Now that hospitals and health systems have realized most of the benefits they expected from the Affordable Care Act, the mergers and acquisitions in the hospital sector have been supplanted by partnerships, clinical collaborations, joint ventures, strategic alliances and affiliations.
But there is one group of acquirers still on the prowl: real estate investment trusts (REITs). Their interest and investment in this sector has grown since 2014, when only three REIT-sponsored deals were announced. Those deals targeted one hospital each, with a total of 94 beds. Combined spending was $1.27 billion.
The action picked up in 2015, with six REIT-backed deals announced. The largest was made by Ventas Inc. (NYSE: VTR), which paid $1.75 billion for Ardent Health Services, then owned by Welsh, Carson, Anderson & Stowe. At the time, Ardent was one of the 10 largest for-profit hospital companies in the country. Ventas spun off Ardent’s hospital operations to Chicago-based Equity Group Investments, LLC in July 2015 for $475 million.
In the first nine months of 2016, six deals were announced, for a combined total of $2.8 billion. Twenty-five hospitals with 3,478 beds were involved. Privately held Carter Validus Mission Critical REIT made four acquisitions ($251 million), and Medical Properties Trust, Inc. (NYSE: MPW) and Medical Facilities Corporation each made one transaction, spending $1.25 billion and $53.6 million, respectively.
Just last week, Ardent Health Services announced its plans to merge its operations with Plano, Texas-based LHP Hospital Group, Inc., which is owned by CCMP Capital Advisers LLC and the CPP Investment Board, for an undisclosed amount. (Ventas issued a commitment to provide $700 million of secured debt financing to an Ardent subsidiary in connection with this transaction.)
The deal will create “the second largest, private, for-profit hospital chain” in the United States, with 19 hospitals. That’s a distant second to Prime Healthcare Services, which now owns 43 acute care hospitals in 13 states.
The largest deal for a U.S. hospital target in 2016 was announced in September by Medical Properties Trust. At $1.25 billion, the company is acquiring the real estate of nine acute care hospitals operated by Massachusetts-based Steward Health Care System, LLC, a portfolio company of Cerberus Capital Management. The total value of this deal includes a $1.2 billion investment in the hospital real estate and a $50 million equity stake in Steward. MPT will invest another more than $100 million in capital improvements for the hospitals.
MPT’s interest in the hospitals will be subject to a master lease and mortgage loan arrangements with cross default provisions and backed by a corporate guaranty.
The investment sets the stage for Steward to expand nationally, and return the original investment Cerberus made in Steward almost six years ago. The agreement also includes a commitment by Medical Properties Trust to participate in up to the next $1.0 billion of Steward’s hospital acquisitions.